Macro Highlights: Donald J. Trump president

Macro Highlights
-
17-11-2016

Analysis by Lisa Turk, economist and member of our Economic Research team, in the special edition of Macro Highlights on the US elections.

When the Electoral College meets on 19 December, Donald J. Trump should be elected president of the United States when 290 Republican electors officially cast their ballots in his favour. While Hillary Clinton actually won the popular vote (50.2% versus 49.7% according to the latest estimates), the winner-take-all voting system 1 has, for the fifth time in US history, given the presidency to the candidate who lost the popular vote. This system does not encourage voter turnout, which was estimated at 57.9%, versus the European average of 65%.

Now that the election is over, everyone is focused on D. Trump’s political agenda. As expected, he will enjoy the support of both houses of Congress: both the Senate and the House of Representatives will have a Republican majority for the next two years. D. Trump racked up an impressive victory, winning historically Democratic states like Pennsylvania and Michigan. He also won almost all the swing states, which do not show a historical preference for either of the two dominant parties.

The Republicans now hold the presidency and the majority in both houses of Congress simultaneously for the first time in more than 10 years (see chart). This should give the president significant leeway. For issues like tax cuts, support for the oil sector and military spending, it is no longer a question of if, but rather when and how much. The president-elect has not yet announced his priorities. Yet on Sunday, 13 November in his first televised interview since the election, he mentioned three measures that the House of Representatives would be ready to pass quickly:

Across-the-board tax cuts are likely to be approved. Not only do the Republicans hold the majority in Congress, but according to the Budget Reconciliation Act, a simple majority of 51 votes is required in the Senate, versus 60 normally. Congress is only likely to argue over the scope of the tax cuts, as some members will not want to widen the deficit. The cost of D. Trump’s tax-cut proposal was estimated at USD 5.3 trillion over 10 years by the independent Committee for a Responsible Federal Budget (CRFB). D. Trump has proposed to reduce income taxes for all income groups, with a maximum rate of 33% on the highest tax brackets (currently 39.5%). He would also like to eliminate the investment income tax and to scale back the estate tax. He has proposed to slash corporate taxes from 35% to 15%, which would reposition the United States from one of the least attractive countries for companies to one of the most attractive ones, according to an OECD study (see left-hand chart on the next page). He would also like to apply a one-time 10% tax on corporations’ repatriated profits.

The Affordable Care Act, better known as Obamacare, could be quickly repealed. The House and Senate had already voted to repeal it, but President Obama vetoed that bill on 8 January 2016. But according to the CRFB, completely abolishing Obamacare could increase the deficit by USD 500 billion. Of course, the government would save money by eliminating its subsidies. But the tax hike initially planned under Obamacare would be reversed, and the savings on Medicare spending would vanish, thus driving spending upward. Congress, reluctant to further feed the deficit, could vote for a partial repeal.

An immigration law could also be quickly passed. D. Trump aims to deport illegal immigrants with a criminal record. This could reduce the labour provided by migrants and the flow of immigrants to the country. The resulting supply-side shock could have an impact on long-term GDP growth.

1 Under the winner-take-all system, used by all states except Maine and Nebraska, the candidate who wins the majority of votes in a state is awarded all that state's electors.